Impacts of Changing Inflation Expectations on Wealth Transfers, Investment Behavior, and Valuation
Gilmer, R.H., Jr.
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https://hdl.handle.net/2142/71507
Description
Title
Impacts of Changing Inflation Expectations on Wealth Transfers, Investment Behavior, and Valuation
Author(s)
Gilmer, R.H., Jr.
Issue Date
1982
Department of Study
Finance
Discipline
Finance
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Finance
Abstract
The purpose of this thesis is the analytical and empirical investigation of the effects of changes in inflation expectations on the market value of common equity. Based on existing theory an analytical model is presented and used to structure an empirical model. Multiple index versions of the market model are used to control for market impacts. Additional variables are included to account for the possibility of dividend yield and firm size effects.
Firm specific variables of the basic model are based on long-term debt, preferred stock, depreciation, and growth in depreciable assets. The long-term debt and depreciation variables are measured using a variant of the concept of weighted average term to maturity or duration. The life of depreciable assets is estimated from net fixed assets and current depreciation charges. For outstanding debt coupon rates, amounts, and maturity dates are taken from 10K's and annual reports.
Using data on eighty-six firms the model is estimated cross-sectionally at monthly intervals over the period July 1978 to June 1981 using the seeming unrelated regression procedure. In addition the model is estimated using a random coefficient regression procedure since the residuals from the different cross-sections were not significantly correlated. The random coefficient procedure is applied to all thirty-six cross-sections and for three subsets of the cross-sections selected on the bases of the changes in expected inflation.
The major hypothesis is that the estimated coefficients on the firm specific variables correlate across time with changes in inflation expectations. The debt and preferred stock variables should be positively related to changes in inflation expectations. The depreciation and growth in depreciable assets measures are expected to exhibit negative correlation with changes in inflation expectations.
Two proxies are used to reflect changes in inflation expectations. One based on 12-month Treasury Bill rates and the other on published annual inflation forecast from a large macro-econometric model. Support for the theory is generally dependent on the proxy employed. The debt and depreciation effects are strongly supported according to the Treasury Bill proxy. The proxy based on the econometric model forecast fails to support the theory with minor exception in connection with the sub-samples when the model is estimated as a random coefficient model.
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